Stocks decline on uncertain rate outlook

MarkCotton

NEW YORK (MarketWatch) -- U.S. stocks ended lower Tuesday as investors remained nervous about the prospects for more interest-rate increases even as most recent indicators show inflation in check and the economy growing at a solid pace.

Home Depot Inc. shares fell to a seven-month low following disappointing quarterly results, weighing on the Dow Jones Industrial Average.

The Nasdaq Composite Index
$COMPQ
was down 9.39 points at 2,229.13 while the S&P 500 Index
SPX, +0.59%
dropped 2.42 points to 1,292.08.

"It's an economic-numbers-driven week and today was chock full of inflation guidance and data on the strength of the economy," said Jay Suskind, director of trading at Ryan Beck & Co. "For the most part, the producer price report calmed inflation fears, while the industrial production data showed the economy running at a decent pace."

Suskind said the market is struggling to build gains on this data because it has been "so battered and bruised over the last few days."

"It's a little nervous," Suskind said. "The market would still like to see tomorrow's CPI number to calm inflation fears some more and then you'll get some stabilization."

The Labor Department on Wednesday is expected to report the consumer price index ticked up 0.5% in April, up from a 0.4% rise in the prior month, according to economists polled by MarketWatch. Core CPI, which excludes volatile items, is forecast to rise 0.2%, down from the 0.3% logged in March.

At the end of last week, stocks sold off heavily after the Federal Reserve left open the possibility of further rate increases should data show inflationary pressures building in the economy.

For Ken Tower, chief market strategist at CyberTrader, the search is on for "a new consensus about growth and inflation and when the Fed can stop raising rates."

On the broader market for equities, advancers had a 16 to 15 advantage over decliners on the New York Stock Exchange and led by 15 to 14 on the Nasdaq.

By sector, drug companies
$DRG
were one of the few areas of the market to post solid gains.

Retailers
$RLX
were one of the most notable decliners, hurt by disappointing results at Home Depot and office supplies group Staples Inc.
SPLS, +0.10%

Home builders
HGX, -0.39%
fell. Morgan Stanley lowered its estimates for a trio of home builders because of rising Treasury yields and lower-than-expected activity during the prime selling season, though the broker reiterated its positive outlook on the sector. Read Ratings Game.

Volume was 1.68 billion on the Big Board, and 2.04 billion on the Nasdaq.

The Labor Department reported that U.S. producer prices rose 0.9% in April, due to surging energy prices, but prices outside of energy were well contained. The consensus forecast of economists polled by MarketWatch was for an increase of 0.8%.

The core producer price index for finished goods -- which excludes food and energy prices -- rose a tame 0.1% for the second month in a row in April, a hopeful sign that higher energy prices haven't led to a more generalized inflation. MarketWatch had expected a 0.2% increase. See full story.

Separately, in the latest sign that the boisterous housing market may be slowing, the government reported that housing starts dropped 7.4% in April to a seasonally adjusted 1.85 million annualized units. It was the largest drop in more than a year. Housing starts are now at their lowest level since November 2004. See full story.

Dollar, bonds, gold, oil

The dollar last was down 0.8% at 109.88 yen, as the euro rose 0.5% to $1.2844. "The data will move the market one step closer to ruling out a June Fed rate hike, and could remove the dollar's recent bid in a hurry," said analysts at Action Economics. See Currencies.

Earlier, the euro was under pressure after a poll of German sentiment fell sharply, raising concerns the European economic recovery isn't as strong as some in the market had expected.

Treasurys rallied after the data, as the tame core inflation number was interpreted in the fixed-income market as a hopeful sign that the Fed could ease up in its tightening program.

The benchmark 10-year Treasury note ended up 22/32 at 100-5/32 with a yield
TNX, +3.23%
of 5.11%.

Gold futures bounced back, after falling almost $27 an ounce on Monday. The recent metals rally, which saw gold reach a 26-year high, has been undergoing a correction. The front-month futures contract ended up $7.90 at $692.90 an ounce.

Crude futures ended with a modest gain after a two-session pullback sparked by a weak demand-growth forecast for 2006. The crude contract for June delivery rose 12 cents to $69.53. See Futures Movers.

Retailers in focus

Wal-Mart Stores
WMT, -0.37%
tacked on 1.4% to $48.07. The retail giant had a stronger-than-expected 6.3% increase in first-quarter profit on sales, in line with Wall Street's consensus estimate. The company attributed its strong performance to keeping inventory in check and to its new-fashioned merchandise. See full story.

Home Depot
HD, +0.65%
a Dow component, saw its shares fall 5.1% to $38.45 as the home-improvement retailer reported a 19% increase in first-quarter profit, but sales fell short of analysts' consensus expectation. Chief Executive Bob Nardelli blamed bad weather and weakness in flooring products for the miss.

The company also said it would no longer provide same-stores sales data, a key measure of performance for the sector, and one closely watched by investors.

"We dislike any decision to reduce transparency, particularly one executed in a quarter then the measure in question most likely shows poorly," Goldman Sachs said in a note to clients. See full story.

Shares in Apple Computer Inc.
AAPL, +1.63%
fell 4.2% to $64.98 after Creative Technology Ltd.
CREAF, -0.77%
filed a complaint with the U.S. International Trade Commission, claiming the maker of the market-leading iPod media player infringed on Creative's patents for some of its own music-playing devices. Creative shares rose 4.8% to $5.72. See full story.

XM Satellite Radio Holdings
XMSR
saw its shares rise 4% to $17.63 after Morgan Stanley upgraded the company to overweight from equal-weight, saying profitable subscription growth beyond 2010 isn't reflected in the share price. The brokerage, however, added that it still prefers Sirius Satellite Radio Inc.
SIRI, -0.11%
Sirius shares fell 2 cents to $4.22.

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